What is Section 34 of Arbitration and Conciliation Act

What are the grounds for challenging the award under Section 34 of Arbitration and Conciliation Act, 1996?

CHAPTER VII

Recourse Against Arbitral Award

Section 34. Application for setting aside Arbitral Award

 (1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the Court only if

(a) the party making the application [establishes on the basis of the record of the arbitral tribunal that:]

(i) a party was under some incapacity; or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

(b) the Court finds that

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of India.

[Explanation 1. - For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,-

(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2. - For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.]

[(2A) An arbitral award arising out of arbitration's other than international commercial arbitration's, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award: Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.]

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:

Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.

(4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.

[(5) An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.

(6) An application under this section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in sub-section (5) is served upon the other party.]

Scope of Section 34 of Arbitration and Conciliation Act

Section 34 of the 1996 Act is one of the most significant provision in so far as it gives an insight into the procedure for setting aside an arbitral award passed by an arbitral tribunal.

The old Arbitration Act of 1940 had failed to resolve the vagueness of the expression “public policy of India” and the grounds which calls for setting aside of arbitral award were also not clearly defined hence giving an opportunity to the Courts to give interpretations according to their understanding and thereby increasing the opportunity of judicial intervention in arbitral process. The Arbitration and Conciliation Act, 1996 and the amendments under the Arbitration and Conciliation (Amendment) Act, 2015 have given a specific shape and character to section 34 of the Act as a tool to decide challenges to Arbitral Award.

Arbitration and Conciliation Act, 1996 which is built on the basis of the UNCITRAL Model Law on International Commercial Arbitration, 1985. 

The Arbitral Tribunal under the 1996 Act cannot review or sit as an Appellate Court against an Award on its own. The aggrieved party who has suffered on account of the Arbitral Award is required to challenge it according to the scope of Law as prescribed.

If the aggrieved party fails to apply and submit objections under Section 34 for setting aside the Award, then a de novo inquiry is not bound to arise on its own.

The Supreme Court has in case titled Indu Engineerinering and Textiles Ltd. v . Delhi Development Authority, 2001 Latest Caselaw 316 SC that “an arbitrator is a judge appointed by the parties and as such an award passed by him is not to be lightly interfered with.” However, since the main aim of the Award is to render legitimate award in the interest of justice, hence the Court is vested with the power to keep a vigil on the Arbitrator’s actions. 

“Public policy” term used in this statute is not defined in the Arbitration and Conciliation Act, 1996 and hence the term has retained its ambiguity. Due to non availability of a precise definition, the term had been given a wide meaning by the courts under the liberty to interpret it according to their understanding. The expression is generally taken to imply larger public interest or public good.

In case titled Renusagar Power Co. Ltd v. General Electric Co. 1993 Latest Caselaw 404 SC where the Apex Court gave a restricted meaning to the expression public policy in an international Commercial arbitration case where an award could be set aside only when the award is against -

1. fundamental policy of India;
2. interest of India and
3. justice or morality.

However the Supreme Court giving a broader meaning to the term “public policy” in ONGC Ltd v. Saw Pipes Ltd, 2003 Latest Caselaw 234 SC, explaining the concept of “ public policy of India” said that it has not been defined in the Act and is vague and is likely to be interpreted widely or narrowly depending on the context in which it is being use and it added another ground namely-

        4. if it is patently illegal.

Law Commission Report No. 246- Amendments to the Arbitration and Conciliation Act,1996 made suggestions so as to make the application for setting aside an arbitral award restricted on grounds of public policy and to apply only when the award was persuaded or affected by fraud or corruption, or was against the fundamental policy of Indian law or in contravention with the most basic notions of morality. The Law Commission was the first to suggest the amendment and its suggestion was later-on incorporated in the Amendment Act.

The Supreme Court in Associate Builder’s v. Delhi Development Authority, 2014 Latest Caselaw 729 SC has elaborated as to what constitutes patent illegality. According to the Court patent illegality shall include:

1. fraud or corruption
2. contravention of substantive law
3. error of law by the arbitrator
4. contravention of the arbitration and Conciliation Act, 1996 itself
5. the arbitrator fails to give consideration to the terms of the contract and usages of trade under section 28(3) of the Act
6. arbitrator fails to give a reason for his decision.

Moreover a proviso is also appended to subsection 2A which states that if the court believes that there is an erroneous application of Law, this cannot be a sole basis for setting aside the award.